Breaking the Barriers
Introduction to “Breaking the Barriers” – A Technological Study of the Obstacles to Pan-European Best Execution in Equities (Jan 2003)
Best execution, broadly understood as the fiduciary responsibility of brokers to execute in the interests of their customers, is currently attracting a great deal of attention both in the US and Europe . In particular, it has been seen as important to clarify and redefine the nature of a broker’s responsibility to his clients, in the light of technological advances (e.g. order routing software) and the emergence of alternative execution venues to the major national exchanges. The UK Financial Services Authority (FSA) and the Committee of European Securities Regulators (CESR) have been exercised by this, and the FSA has recently published a consultation paper setting out its recommendations (FSA, 2002). The purpose of the present report is to explore the technological issues concerning the adoption of a pan-European best net price calculation as a benchmark for analysing and implementing best execution requirements.
At present no package is specifically marketed to provide automated routing to the European execution venue which offers the best price after deduction of all direct costs. Our main focus in this study is to identify the elements of technology necessary for this purpose (Section 1), to investigate the current state of availability of systems performing the three main component functions – pan-European price consolidation (Section 2), real-time net price calculation (Section 3) and “smart” routing to the best price (Section 4) – and to explore how these components could be brought together in an affordable way (Section 5). These purely technological issues touch on regulatory matters which we consider in the second half of the paper. We discuss there the suitability of specifying a pan-European price benchmark (Section 6), of mandating linkages between clearing and settlement systems (Section 7) and of standardising exchange interfaces (Section 8).
As a result of the research reported here, the authors are confident that all the technological elements of a pan-European best net price execution system are already available. Moreover, these elements can be packaged into very affordable products able to cope with (i) the large number of execution venues, (ii) the substantial amount of real-time data required to feed the netting calculations and (iii) the routing of orders in response to those calculations. We also believe strongly that this understanding of “best execution” would be in the interests of all investors (particularly retail investors) and should be adopted by the regulators. The report includes a number of other regulatory suggestions which, it is argued, would facilitate this focus on net price based best execution. These suggestions, in the areas of exchange interfaces and clearing and settlement linkages, should not be costly to implement, would lower costs to the industry and greatly facilitate moves towards both improving customer protection and providing a more integrated and efficient European equities marketplace.